Operational Impact of Stockout Service Level in Dynamic Inventory System

Description

When customers often experience stockout in a store, they will switch to other stores fora better service. This intuition is verified by empirical studies that have shown thatstockout service level affects future demand. However, the vast literature on inventorycontrol has largely ignored this effect. In this project, we investigate the impact of thestockout service level on the firm's profit and its operational policies. We consider aperiodic review inventory system in which demand in a period is encouraged by goodservice levels in previous periods. We want to investigate how the optimal inventorycontrol policies for inventory systems with stockout-dependent demand differentiatefrom those for the classic inventory models without stockout effect. We try to offerinsights on how to effectively manage these systems. We also want to identify marketconditions under which the firm's profit loss due to neglecting stockout-dependentdemand is most significant.